Posted in Finance, Accounting and Economics Terms, Total Reads: 810
Definition: Foreign Convertible Bonds (FCB)
A Foreign Convertible Bond (FCB) is a convertible bond that is given in a different currency that is not the issuing company’s domestic currency. So, the amount received by the issuing company through sale of the bond, is in some foreign currency.
A convertible bond is a type of bond which can be converted to shares of common stock of the company that issues the bond. The prices that the bonds are converted at, and the number of shares received per bond is a commonly agreed upon by the issuer and the buyer, at the time of issue itself. Generally, a convertible bond is a safe instrument for investors, whereby they can get regular coupon payments like a bond, and take advantage of appreciation of stock prices as well, by conversion of the bond into stocks. However, the issuing organization may also have interest in the issue of this type of bonds, because the coupon payments are generally lower than the normal bonds issued. So in a way, the company can issue debt at a lesser rate through issue of convertible bonds. Although a convertible bond has these benefits, it causes dilution of shareholder equity and bring down the earnings per share, when a convertible bond holder converts the bonds to stocks.
Foreign Currency Bonds are generally issued by companies that want to raise money in another country due to any upcoming project or investment in that country. It reduces the foreign exchange risk for the issuer in that case. Foreign Convertible Bonds are also a good option for companies in developing countries that wish to raise capital through foreign investors.
Example: ABC Corp, an Indian firm issued foreign convertible bonds worth $50 million because of a good investment opportunity in the US. Through these bonds, capital was raised from US investors, and ABC Corp reduced its exchange rate risk as well, which occurs due to constant rupee-dollar fluctuations. Also, for the investors, the bonds can be converted to stocks if the price appreciates.